Google will be asked to explain 'cosy' UK tax deal to lawmakers

Google has agreed to pay £130 million in back taxes, but critics say it owes millions more.

British politicians want to know why Google is paying so little in back taxes, and will demand that the search giant come in for a talk.

The company and the tax authority, Her Majesty's Revenue and Customs, will be summoned by the U.K. Parliament's Public Accounts Committee to justify a settlement in which Google UK will pay £130 million (US$186 million) in back taxes. On Saturday, Committee chairwoman Meg Hillier said in a tweet, "Bet individual taxpayers wouldn't get off as lightly as Google on back tax. Cosy deal. Will call HMRC and Google to @CommonsPAC to explain."

The settlement followed an investigation of Google's accounts back as far as 2005, opened by HMRC in 2010. That investigation prompted the company to set aside an additional £24 million provision for back taxes in its 2012 accounts.

While the company claimed to be paying far above the standard rate of corporation tax in its most recent accounts filed with U.K. authorities, it has been accused of manipulating its results so as to show an artificially low revenue and taxable profit in the U.K.

The discrepancy can be seen in the company's results for 2013, the last year for which Google U.K. filed accounts with Companies House, the U.K. business registry.

For that year, Google U.K. reported that its 1,835 staff generated revenue of £642.4 million. The company set aside £21.6 million for tax and reported a net profit of £49.2 million, for a profit margin of 7.7 percent.

Looking purely at the profit declared, that equates to a fairly generous tax rate of 30.5 percent, higher than the official U.K. corporation tax rate of 23 percent for that year, and almost double the 15.7 percent effective tax rate that the parent company reported globally.

Yet Google U.K.'s parent company in the U.S. said that $5.6 billion of its global revenue of $59.8 billion that year came from the U.K, almost five times what it reported to U.K. authorities.

Google UK is able to legally report so little U.K. revenue because, according to its filings, it exists to provide marketing services to Google Ireland and research and development services to its U.S. parent. Revenue from the advertising it markets in the U.K. is actually billed through its Irish subsidiary, which pays it a fee for its services.

Had Google channeled all the revenue from U.K. advertising through its U.K. subsidiary, then given the same profitability and effective tax rate as it saw globally, it might have expected a U.K. tax bill nearer $213 million, or £129 million at the exchange rate of the time, rather than the £21.6 million it actually paid.

That's almost as much tax in one year as the company has now agreed to pay in back taxes for a ten-year period.